Markets regulate themselves
Long before the existence of the Securities and Exchange Commission, medieval guilds and trading houses established common standards, accreditation agencies, and accounting rules that have evolved to the present day. The system of English common law has been evolving since the 12th century 1, and the accounting system used today was codified in 1495.2.
Numerous non-governmental bodies have continued to develop accounting rules and set auditing standards for public organizations.3 It is the American Institute of Certified Public Accountants, not the government, which sets ethical standards for the profession and U.S. auditing standards for audits of private companies; federal, state and local governments; and non-profit organizations.
Voluntary oversight organizations are embraced by their participants because they provide executives with a value – they allow them to discover waste and fraud and advertise honesty to partners and customers. Unlike government regulatory bodies, they are flexible, efficient, and competitive. When the compliance costs of accounting rules exceed their value, or when lax controls lead to unethical or risky behavior, the markets embrace new standards. The Securities Act of 1933 and the Securities Exchange Act of 1934 did not begin the process of regulating markets, but nationalized much of the auditing market and turned it over to politicians and bureaucrats.
Regulations hinder competition and raise costs for investors
The SEC subsidizes politically connected corporations at the expense of smaller firms, hindering innovation and encouraging corruption. Established corporations lobby the government to create burdensome regulations that smaller investment funds and markets cannot afford, thus creating coercive monopolies that raise profits a few firms at the expense of investors.4 Government bodies like the SEC, the MSRB, the FTC, the USITC, the Fed, the Treasury, the IRS, the OTS, the MSRB, and the state attorney’s offices issue hundreds of thousands of laws, rules, opinions, bulletins, comment letters and threats and require numerous reports, statements, forms, notices, and approvals that investment firms and public companies must obey. 5 This creates an artificial scarcity of investment products that benefits large corporations and discourages savings and investment. Smaller companies cannot afford to raise money by issuing stock, and investors are forced to choose between public but expensive mutual funds and secretive and risky hedge funds with entry fees that only the rich can afford.
The SEC creates corruption
Rather than making Wall Street honest, regulatory agencies are the primary instruments of fraud and corruption on Wall Street. Politicians who control regulatory agencies have an incentive to use their power to extract benefits for themselves and their constituencies, rather than to keep markets honest and efficient. Power hungry politicians like Eliot Spitzer use the power of the SEC to go on crusades again innocent businessmen 6, and thus force regulatory bodies to hide the evidence of real corruption.7 By blocking outsiders from seeing its records, the agency is makes it harder for investors to discover real fraud.8
The case of Bernie Madoff is a typical case study in how the SEC encourages fraud. Investors figured out that Madoff couldn’t possibly make the profits he claimed, and have been writing the SEC since 1999, urging them to put a stop to Madoff’s Ponzi scheme. However, Madoff used his close family ties to the SEC, and was instrumental in founding key regulatory bodies – and then nominated his family members to serve on their boards. When skeptical investors inquired about the irregularities in his fund, Madoff told them that the SEC had already investigated and cleared him over a period of three years.
While Madoff stole $50 billion dollars under their noses, the SEC’s budget surpassed $900 million dollars, and grew at record rates during the two Bush administrations. In response to this outrageous case of nepotism and corruption, the government will likely increase its budget and staff once again.9
The SEC makes markets more volatile and risky
By banning crucial market functions like short selling10 and “insider trading” 11 the SEC hinders the market’s ability to react to new information, and makes markets more unpredictable and expensive.
The SEC cannot even oversee itself
While the SEC is charged with enforcing regulations like Sarbanes-Oxley, it consistently fails to control and report on its own processes and receives failing grades from the government’s own auditing body.12 This is not surprising – like any socialist organization, it has no incentive to be efficient or responsible to stockholders.
The chief source of fraud and corruption in the United States is not Wall Street, but Washington D.C.
- Medieval English common law: foundations for 21st century legal systems
- Wikipedia: The history of accountancy
- Self-Regulation in Today’s Securities Markets: Outdated System or Work in Progress?
CFA Institute Centre Publications (September 2007)
- See How the SEC Subsidizes Stocks by Jeff Scott and SEC: Protecting Investors Or Uncompetitive Companies?
- (There are so many regulations that the department charged with publishing them can only report that “The Office of the Federal Register Library now contains more than 550 cubic feet .. which has the force and effect of law.” – History of the Federal Register
- The Cost of the “Ethical” Assault on Honest Businessmen by Alex Epstein and Yaron Brook (Silicon Valley Biz Ink, July 8, 2003)
- Deafened by the S.E.C.’s Silence, He Sued
- The S.E.C. Prevents Investors From Discovering Accounting Fraud
- The SEC Makes Wall Street More Fraudulent by Robert Murphy
- See the One Minute Case for Stock Shorting
- See Inside Insider Trading and Should Insider Trading Be Legal? by Yaron Brook
- GAO Finds Material Weakness in SEC’s Controls